Japanese Yen: Policy pressure and FX path – Rabobank

Rabobank's Jane Foley discusses the weakening Japanese Yen (JPY) due to Prime Minister Sanae Takaichi's preference for low interest rates and recent US Treasury pressure on the Bank of Japan (BoJ) policy. Foley suggests that inflation risks support further BoJ tightening, and a potential rate hike could strengthen the Yen, with USD/JPY possibly reaching 157-158 over the next 3-6 months.

The US Treasury supported JPY intervention in late July, and both JGB yields and US Treasury yields have been rising due to supply and inflation concerns. Takaichi's fiscal dove reputation and low interest rate preference have weakened the JPY, leading to speculation that the government may have been pressuring the BoJ not to raise rates.

With tight labor market conditions, a resilient economy, high oil prices, and a weak JPY, there is a risk of second-order price effects in Japan, indicating that the BoJ may raise rates again. Foley believes that fear of further FX intervention in support of the JPY and the prospect of a BoJ September rate hike suggest potential upside for USD/JPY in the 158-157 range over a 3-to-6-month period.